Gulf oil spill: why the US wants a healthy BP

Oil breaches a hard boom that surrounds Cat Island off the coast of Louisiana on Monday. It's in America's interest that BP be healthy enough to pay the costs of the Gulf oil spill rather than American taxpayers.

Derick E. Hingle/AP

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President Obama vowed Tuesday to "make BP pay" for the Gulf oil spill, but make no mistake: That means Washington should want BP to prosper rather than be driven to financial ruin.

That's what oil-industry analysts say, and that's what the Obama administration itself appears to be saying. The oil spill will cost billions of dollars over a number of years, and it's in America's interest that BP be healthy enough to pay those costs rather than American taxpayers.

On Wednesday, a senior White House official told the Bloomberg news service that the Obama administration doesn’t expect BP to agree to anything that would make the company inviable, such as dismantling itself.

Stock analysts also say that a viable company – and a viable oil-production industry in the Gulf of Mexico – is in US interests.

"We think [politicians will] come to the same conclusion that we have – BP is worth more alive than dead," Dan Pickering, head of research at Houston energy investment bank Tudor, Pickering, Holt & Co., writes in a recent analysis.

The idea that BP's very survival might be threatened has appeared, to most stock analysts, to be only a remote possibility. The company reaps a huge cash flow from its global operations, and it could potentially sell some prize assets if needed. But as spill-related liabilities have risen, investors have become more worried about the company's future.

Fitch Ratings this week downgraded BP's debt by six credit-rating notches, to BBB from AA. The new bond rating, still two notches above high-risk "junk" status, reflects the financial uncertainty surrounding BP.

On Wednesday, Mr. Obama and other administration officials met with leaders of the company to discuss a framework for an escrow fund through which BP would pay spill-related costs. According to news reports midday Wednesday, BP agreed to put $20 billion into an escrow fund, and high-profile attorney Kenneth Feinberg will be the fund's independent administrator. In the past, Mr. Feinberg has overseen legal claims related to the 9/11 terror attacks and for executive-pay restrictions tied to government bailouts of corporations during the financial crisis.

BP was also considering suspending its dividend for shareholders, under pressure from Washington.

Amid this swirl of events, investors have driven up the price of buying insurance against possible bond default by BP.

By some estimates, the spill could cost $40 billion. The investment firm Credit Suisse has offered that figure, with about 60 percent of that for environmental cleanup and 40 percent to pay for the economic toll on the Gulf region. Although the Credit Suisse analysis found that this burden would be manageable for BP, the company's cash flow still hinges on retaining the confidence of bankers and business partners.

In that sense, the healthier BP remains, the better it is for US taxpayers who might otherwise have to bear some costs of the disaster.

"We will make BP pay for the damage their company has caused," Obama said near the start of his address to the nation Tuesday night. He added: "We will do whatever’s necessary to help the Gulf Coast and its people recover from this tragedy."

If the administration doesn't want to see a BP bankruptcy, that doesn't mean that, to paraphrase an old line about General Motors, "what's good for BP is good for America." In important ways, the two sides will remain rivals. The administration and members of Congress, for example, want to hold BP fully accountable for actions related to the oil-rig failure – including an inquiry into possible criminal charges against the firm.

At the same time, Obama must walk a careful line, energy analysts say. While taking prudent regulatory actions to ensure against BP-style spills in the future, the president must guard against sowing chaos in an important industry for the Gulf region and for America, they say.

If it pushes too far, the Obama administration could end up raising the costs of drilling in the Gulf, reducing jobs in the region, and pushing the oil business overseas, Mr. Pickering says in his analysis, posted on the website of Forbes magazine. "New rules and regulations will make it safer to drill in the deep waters of the US – but will anyone want to do it?" he asks.

"I’ve issued a six-month moratorium on deepwater drilling," Obama said. "I know this creates difficulty for the people who work on these rigs, but for the sake of their safety, and for the sake of the entire region, we need to know the facts before we allow deepwater drilling to continue."